You are considering a 5/1 ARM and a 30 Year fixed rate mortgage to finance your property. The loan…

You are considering a 5/1 ARM and a 30 Year fixed rate mortgage to finance your property. The loan…

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You are considering a 5/1 ARM and a 30 Year fixed rate mortgage to finance your property. The loan will
be for $400,000. The ARM has closing costs of $5561 and an APR of 2.625%. It has an annual interest
rate cap of 2% and a lifetime cap of 5%. The fixed rate has closing costs of $4314 and an APR of 4%. You
do not plan to make any early prepayments, unless you sell the house.
a. Assuming a worst case scenario for interest rates, what is the effective cost for each loan and which
loan is preferred if you anticipate selling the home in 5 years.
b. Assuming a worst case scenario for interest rates, what is the effective cost for each loan and which
loan is preferred if you anticipate selling the home in 10 years.
c. Assuming a worst case scenario for interest rates, what is the effective cost for each loan and which
loan is preferred if you anticipate keeping the home at least 30 years.

Expert Answer:

Answer rating: 100% (QA)

Assuming a worst case scenario for interest rates 5 1 ARM Initial interest rate 2 625 for 5 years Fully indexed rate 7 625 2 625 2 5 30 year fixed rat
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